Budget and debt problems are once again racking America. Barack Obama has failed to persuade the Republican majority in Congress to raise the national debt ceiling. That much is nothing new, and similar attempts will be unlikely to succeed in the future. Since July 10, the White House has been holding daily consultations on raising the ceiling. The current ceiling of $14.3 trillion must be raised by several hundred billion, or the Department of the Treasury will run out of money by August 2.
The Americans raise their debt ceiling on a regular basis. Since 1993, they have come close to defaulting 16 times. In 1995, the government even shut down for a week. In the past, the world perceived these exercises as a matter of course, whereas now the unwritten rule of the U.S. budget is increasingly becoming a sore subject.
The times have changed, and the national debt and deficit have become too astronomical to be treated as an American eccentricity, especially considering the U.S.-bred financial crisis of 2008 and the backdrop of failing finances in Greece, Ireland, and Portugal (likely to be followed by Spain and Italy) and the patently pre-crisis condition of the Euro.
The U.S. Department of the Treasury has not yet announced who will be the hardest hit if worst comes to worst – the secretaries of departments, other officials, congressmen, senators, the Pentagon, intelligence, teachers, transportation workers, the IRS, NASA, museums, or janitors. That much, at least, is of little concern to Europe.
The problem is not salary cuts for specific agencies but U.S. solvency. Nobody is saying that the United States will immediately default on its entire sovereign debt – it remains the most reliable debtor in the world.
The trouble lies elsewhere:
a) The national debt continues to swell (in reality, it exceeded the ceiling of $14.3 trillion in May).
b) The federal government has come too close to being unable to pay interest on its debt too often.
c) Due to the uncertainty surrounding American debt and financial upheaval in parts of Europe, interest rates are growing on all financial markets;
d) Insurance rates on credit are growing.
e) The stock exchanges are getting nervous.
Put together, these factors may constitute a volatile mixture that could flare into another global financial crisis. It may start with minor market convulsions that erupt into something much larger.
The extent of European frustration with American debt is aptly expressed in one telling commentary. The British journal The Economist, a well-known guru of the free market, free trade, and sound conservatism, supports Obama’s position and calls Republican grievances with the budget proposals of a Democratic president “a gamble where you bet your country’s good name.” It considers such conduct shameful and absurd for Republicans who advocate reductions in government spending.
Cuts in social spending and higher taxes are still the only way of reducing budget expenditures and a country’s sovereign debt. This is exactly what Obama suggests, but the Republicans object to any such tax increases. Meanwhile, they are ready to reduce the budget by only $2 trillion instead of the $4 trillion that Obama suggests.
To cut is to heal
In European eyes, these developments in the White House are a farce rather than a tragedy. It is something akin to taking the world’s financial and economic players hostage and making them the captive audience to an American soap opera that has evoked little but bewilderment and confusion.
It is clear that the Republicans do not want to come to Obama’s aid on the eve of the 2012 presidential elections, but it is unclear why they insist on keeping the rest of the world in suspense.
America is far from being a champion of the ratio between its GDP and national debt. That debt amounts to 65% of its GDP and ranks 37th on the list of major global debtors. Yet many European countries fare worse: Greece (144%), Iceland (123%), France (83%), Germany (78%), and Britain (77%).
A look at the information provided by the CIA (or IMF – they are only slightly different) makes it clear that Japan is worst off in terms of debt: 226% of the GDP! Only St. Kitts and Nevis come close with 186%.
The debt section of the CIA’s yearly periodical is the only economic publication in which we are pleased to see Russia in 123rd place (out of 132). We seem to have left everyone behind with a debt of only 9.5% of our GDP.
In fact, we are among the leading creditors of the U.S. government, although we cannot yet afford to talk to Washington or ignore its opinion like China, its biggest creditor. Washington owes $1.154 trillion to Beijing, amounting to 25.8% of U.S. external debt. Japan is the runner-up with $890.3 billion in U.S. treasury bonds. Put together, Tokyo and Beijing account for 45.7% of total U.S. debt. Russia’s share is some $130.5 billion or a mere 2.9%.
American debts are still considered the most reliable in the world. U.S. bonds have almost the same liquidity as dollars on the debt security markets. But Moody’s has already hinted that if the United States delays payment on its debt, there will be consequences for its credit rating. Moody’s Spokesman Steven A. Hess put it succinctly when he said that if a debtor delays interest payments once, it may do so again, adding that it will automatically remove the debtor from the top category of the credit rankings.
There is still hope that these problems will dissipate by the August 2 deadline. The world is counting on the fact that a new and massive “Greek dilemma” is not on the horizon. But the longer this situation lasts, the greater the risk that America’s debt problems will cause a chain reaction. If so, the storm clouds of a new crisis will form again in earnest and on an unprecedented scale.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.